Most of the UK’s largest retail banks are set to appeal against a recent court ruling on overdraft charges in a move that could result in years of litigation before the issue is resolved.
The Office of Fair Trading brought the case against eight major retail banks following claims for compensation from hundreds of thousands of bank customers about overdraft charges for bounced cheques and unauthorised overdrafts which could be as much as £30 per item.
Many complainants succeeded in winning compensation in the county courts but the deluge of cases brought chaos to the legal system and because county court judgements do not set a legal precedent, each case had to be heard on its own merits.
Eight high street banks, including HSBC, Barclays and Royal Bank of Scotland, will seek permission tomorrow to appeal against the recent High Court judgement that overdraft charges are subject to unfair consumer contract regulations.
If the High Court judgement is upheld, the OFT would have the right to impose a limit on banks’ overdraft fees. To date, the OFT has not said what it would regard as a fair level of charges, but in 2006, it capped late credit card payment charges at £12.
Industry experts believe that a similar cap on overdraft charges would result in the loss of £10bn a year in revenue and that banks might seek to recoup this by charging customers for in-credit banking and other services.
Consumer groups, such as Which? magazine have argued that the overdraft charges levied by the banks are excessive, given that the cost of dealing with bounced cheques and unauthorised overdrafts is around £4 per item.
Anyone who has an existing compensation claim on hold will have to await the outcome of the litigation.
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A High Court judge has ruled that the Office of Fair Trading (OFT) can apply consumer contract regulations to decide if bank overdraft charges are fair or not.
But the long awaited ruling will do little to unblock the log jam of disputes between banks and their customers which have been kept on hold at county courts up and down the UK since July last year.
Mr Justice Andrew Smith said that his ruling did not necessarily mean that the banks’ overdraft charges were unfair, leaving the door wide open for further test cases against individual banks for unfair and excessive overdraft charges.
Since the row over bank charges first erupted in 2006, hundreds of thousands of aggrieved bank customers have taken their banks to the county court in a bid to reclaim penalty charges for overdrafts.
The BBC estimates the banks refunded about £784m to nearly 378,000 customers in 2007, but analysts at Credit Suisse estimate the potential bill could be as high as £5bn.
Because of the number of claims was blocking up the county courts and the fact that county court judgement do not set a precedent, the OFT agreed in July 2007, with seven banks and the Nationwide building society, to bring a test case in the High Court to decide whether the OFT had the power under consumer contract regulations to regulate overdraft charges.
Further High Court hearings are expected in order to bring some clarification as to what is a fair level of charges. Banks typically charge £25-30 for a bounced cheque, but an ex Yorkshire Bank employee told the BBC last year that the actual cost to the bank of dealing with unauthorised overdrafts was just £2 per cheque.
The OFT has successfully forced banks to cut their credit card default charges to no more than £12 last year and earlier this month it ordered Clydesdale Bank to reduce penalty charges on its store cards from £22.50 to £12. It remains to be seen if it is as successful with bank overdraft charges.
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